People often ask what is a family LLC when they want to start a business with their family members. It's important to know the legal implications of a family LLC and the benefits before starting one. A family limited liability company, also called family LLC is a type of business or investment entity ownership that offers its owners improved protection from the business entity's liabilities and generous estate and gift tax benefits.
The only difference between a family LLC and regular LLC is that only people with blood or marriage relations can form a family LLC.
The enhanced protection enjoyed by owners of a family LLC is due to a restrictive operating agreement which clearly defines and limits ownership and transfer rights.
The operating agreement of a family LLC defines its daily activities. It can be prepared by the families themselves, by an attorney, or through an agency that provides legal document services.
A Family LLC usually own rental properties, brokerage companies, and a portion or all of the family's business operations. On the other hand, an LLC can own anything, except for a personal residence which cannot be owned by a business entity as it violates its tax status.
A family LLC is protected from a charging order, allowing you to negotiate from a position of strength if a creditor with a charging order tries to force you to pay distributions through your LLC. Thus, you can settle the matter out of court.
This will make it difficult for a creditor with a charging order to interfere with the LLC operations and make it easier to opt for an out of court settlement.
Strengthening the structures of a family LLC is achieved by selling or gifting ownership interests to other family members either in trust or outright.
The LLC has to be registered in a state that has protective LLC legislation.
Some states place extreme restrictions on creditor rights regarding LLCs registered to do business in the state. For instance, Wyoming prohibits creditors from gaining access to the records and books of an LLC and the company's Articles of Organization may not disclose the members or managers.
The reason for this is that a family LLC is treated as a pass-through entity like a partnership, and the profit and losses of the company are passed on to the members.
The contributions of business or investment assets to the family LLC are exempt from tax.
A family LLC may be eligible for large discounts for estate and gift tax.
An attorney who is experienced in forming family businesses is needed when starting a family LLC.
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